What guidance on WHS factors do investors need when assessing company performance? And, more pertinently, what guidance is available for investors to obtain?

A number of reports commissioned by Britain's Health and Safety Executive have provided some initial direction in this area. Given the global nature of investment, the insights provided in this report are extremely relevant in the Australian context.

The first report

The initial report, Health & Safety Indicators for Institutional Investors, was commissioned by Britain's Health and Safety Executive as part of its strategy to 'find new levers of influence to motivate business at Boardroom level to improve health and safety'. The report was based on a series of 10 meetings with motivated representatives of the investment community conducted by a commissioned consultant. The aim of the meetings was to tease out the WHS indicators which would be most meaningful and useful to institutional investors, particularly with the rise in interest in socially responsible investment. The report was published in May 2002.

The indicators

The report concluded that, to be attractive to the investment community, indicators should be:

relatively few in number (five or six)

relevant to the industry in question

comparable between companies ¯ ie calculated on the same basis, and

ideally, globally applicable.

Core indicators

Six potential core indicators have been identified:

whether a director has been named as an WHS champion

the level of reporting of WHS management systems

the number of fatalities

the lost time injury rate

the absenteeism rate, and

the cost of WHS.

Two other indicators, if developed, would be useful:

a 'cost of poor WHS indicator', and

a 'health and safety engagement index' which could provide a simple indicator of high level management engagement in addressing WHS.

Importantly, all participants considered that WHS is an indicator of good management in an organisation. This could be in the risk management context, that is, poor WHS risk management was an indicator of generally poor risk management in the organisation, or in the human capital context, where good WHS is an indicator of overall commitment to staff morale and a positive corporate culture.

A summary of the indicators follows.

Criteria for indicators

The small number of indicators (five to six) is important due to the sheer volume of information which institutional investors are required to assess.

The ability to judge the indicators between companies is the most important feature for many participants. If data is presented differently between companies, it is difficult to compare an organisation with its peers (which is after all one of the key tasks which institutional investors perform on behalf of their clients). As an example, the units used by many companies reporting on their lost time injury rates, varied widely — rates were reported per million hours worked, per 2,000,000 hours worked and per 1000 employees etc.

Global indicators are important because business is now essentially global. Competitors may be offshore, or offshore operations may be as important as domestic operations. Suggested international initiatives seeking to standardise performance indicators include those being developed by the Global Reporting Initiative and the European Chemical Industry Federation.

Policy and board indicators

Board involvement is considered among the most important indicators. A related indicator is that there should be a director on the committee responsible for developing WHS policy.

Management indicators

It is difficult to identify overall management indicators, because although they are generally seen as very important there is little clear understanding of which specific indicators are the most important.

The importance of resources devoted to WHS and particularly training is a key indicator, as this reflects a desire to assess culture and practice in an organisation.

Another important indictor is the internal use of a number of quantitative indicators, assessed by the company as relevant.

Reporting

The level of reporting is considered a key indicator. WHS fits into the increasing pressure for social and environmental issues to be reflected in good investment.

Reporting of performance is indicative of a high level of management commitment and openness and therefore a useful indicator.

Performance indicators

Performance indicators probably must be assessed on a sector-by-sector basis, as the differences between industries must influence these indicators. However, the report sees fatalities as an important performance indicator, regardless of industry, due to the impact which these can have on corporate liability and reputation.

Despite its drawbacks, the Lost Time Injury Rate is often used to gauge health and safety performance, as that it is the most widely used and most standardised indicator. However, more work still needs to be done on standardisation of this indicator so as to ensure reliable comparability.

The absenteeism rate is considered to be a good indicator of health performance and, again, an indicator which is relatively standardised. Note, however, that flexitime can reduce the notional absenteeism rate.

Another indicator which attracted some interest is the number of enforcement notices and convictions recorded by a company. While these may be dependent upon the particular regulatory regime as well as the resources available to government to support and enforce regulation, there is a high level of interest from investment bodies in this indicator. One potential area of difficulty is linking data from a particular company to a parent company to give a more complete picture of corporate performance.

Cost indicators

A suggested cost indicator of poor WHS could include the following factors:

The ability to view WHS costs as percentage of profits is likely to motivate company boards to take action on WHS. Investors also would appreciate such clear financial indicators.

Engagement index

A possible way forward for investors seeking reliable WHS indicators, is the development of a third party assessment system. An example of such a system is the UK Business in the Environment index of environmental engagement, which has been successful in encouraging company boards to take environmental issues seriously. Such a system would work via an independent organisation questioning 'leading companies on their approach to [WHS] management, policy and reporting, and the results scored to provide a rating and/or ranking'.

Publication of the results as an index would encourage competition between organisations to move up the rankings and not be seen as a poor performer in this area. No such index yet exists for WHS performance, but its development is feasible. The report supports the development of an WHS index, as long as it has adequate financial backing and also that it have board backing from a core group of companies which can nurture its development.

Workplace health

Reliable indicators of workplace health, in particular the monitoring and encouragement of health and safety in an organisation, are more difficult to devise. Indicators such as workplace health programs, provision of fitness centres and healthy food options are not reliable. The only acceptable indicator of workplace health identified by the report is absenteeism (all absenteeism, not just work-related illness).

Note, however, that employee health is a good indicator of employee motivation and productivity. This is of interest to investors as human capital is perceived as a key contributor to corporate success. Employee health can be an indicator that a company treats its staff well.

Further research

Further research was commissioned by the HSE Executive in the UK for the development of a Corporate Health and Safety Performance Management index (2004) and in the validation of the index (2005).

‘The results indicated that an Index of company health and safety performance can be used to compare organisations. The Index is practical and takes a reasonable amount of time to complete, although it is not clear that all organisations can readily include contractor injury or absence rates in their responses’.

The 2005 validation study found ‘Overall there were few issues related to the practical use of corporate health and safety performance index, most users found it face valid and a number of potential benefits were identified. Difficulties were highlighted in relation to the ability to complete the Index at group level, the value of some of the indicators and being proportionate to low risk environments’.

This was used to formulate Public reporting of health and safety performance which is useful for investors.

The UK HSE ‘encourages all businesses, public bodies and third sector organisations with more than 250 employees to summarise their health and safety plan and performance and make it publicly available in their annual reports and on their websites’.

‘In order to assist large organisations to report publicly to a common standard, (UK) HSE has issued guidance that identifies 11 key health and safety issues that reports should cover. The 11 health and safety issues are grouped under the following headings.

Principles

Broad context of the health and safety policy

Significant risks faced by employees and the strategies in place to control the risks

Health and safety goals

Progress towards achieving health and safety goals

Arrangements for consulting employees

Performance

The number of work-related injuries, illnesses and dangerous occurrences

Details of any fatalities and preventative actions taken

The number of employee days lost

The number of health and safety enforcement notices

The number and nature of convictions for health and safety offences

Targets

Health and safety targets’

WHS indicators for investors

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What guidance on WHS factors do investors need when assessing company performance? And, more pertinently, what guidance is available for investors to obtain?